Analytically, if the Chinese economy is depicted as a speeding car, then are three classes of failures that could result in a car crash: (1) hardware failure, (2) software failure, and (3) power supply failure.

A hardware failure refers the breakdown of an economic mechanism, a development that is analogous to the collapse of the chassis of the car. Probable hardware failures are (1) a banking crisis that dislocates production economy-wide, and (2) a budget crisis that necessitates reductions in important infrastructure and social expenditure.

A software failure refers a flaw in governance that creates frequent widespread social disorders that disrupt production economy-wide and discourage private investment. This situation is similar to a car crash that resulted from a fight among the people inside the speeding car. Probable software failures could come from (1) the present high-growth strategy creating so much inequality, and corruption that severe social unrest results; and (2) the state not being able to meet the rising social expectations about governance issues.

A power supply failure refers to the economy being unable to move forward because it hits either a natural limit or an externally-imposed limit, a situation that is akin to the car running out of gas or having its engine switched off because an outsider reached in and pulled out the ignition key. Examples of power supply failures are (1) an environmental collapse; and (2) a collapse in China's exports because of a trade war.

My assessment is that the highest probability event in hardware failure is the weakening of China's fiscal position; the highest probability event in software failure is social disorder, and the highest probability event in power supply failure is water shortage. And my ranking of the probability of these three specific negative events in descending order is social disorder caused by outmoded governance, water shortage as a result of inept environmental management, and fiscal crisis generated by the repeated recapitalization of the state banks and the rapid aging of the population.

Woo is catiously optimistic - these hazards need not necessarily crash the economy.

Will China succeed in establishing a harmonious society and completing the overhaul of its economic system? My answer is a very cautious "yes". I am optimistic because both Chinese society and government want the economy to continue its convergence to a modern private market economy.

My considerable caution comes from (1) the new major reforms being technically difficult to implement (e.g. setting up social safety nets), and having few, if any, successful precedents in the world to draw upon (e.g. designing market-compatible environmental regulation); and (2) the possibility that the many potential losers from these major reforms could successfully organise to resist meaningful implementation of the reforms.

Can China manage its growth in a sustainable fashion? The question prompted some kind of cross-board selling of CCP200 related stocks and funds in US last Thursday , the stock market’s way of asking questions, and often the way for investors to buy at dip.

The answer to the above question is not in economics, but in politics, or PA, one of my terms. For readers with further interest, I suggest a reading list started with Vladimir Lenin’s book such as “State and Revolution”. Lenin basically transformed Marx’s theory into organization and practice, and he was one of the masters of “organizational politics” in human history.

That may sounds too crazy, even in terms of “out of box”, so instead, let’s just review briefly the Chinese soap opera “Major Ma”.

In the story, “Major Ma”, together with a group of his homeless teenagers buddies was arrested by police, when they started a debt collection business. Major Ma questioned the police: what is wrong with collecting debt from those corporate debtors? The police read him a CCP document (not really a law) that “at present, no individuals or corporations should be allowed to set up any debt collection business, whatsoever”. I guess, the story time was when many China state enterprises, including banks, were notoriously “trapped in a debt triangle”, and everybody thought China banks would collapse going forward. Of course, a few WS folks, such as GS, were smart enough and managed to get a few pieces of China banks before they went IPOs in 2005 and 2006.

The point is: with a history of 56 years of “hot” and “cold” war experience, and Master Lenin and Mao’s theories, particularly of those “Organization and Management”, and with a 40M party “MBAs” managing various governmental and corporate businesses, what cannot be “managed”?

It seems that not only people like Major Ma is increasingly “Unite Around Party”, but also other Asian countries:
“The share of Developing Asia's intraregional exports went from 26% in 1985 to 37% in 2005.

Asian exports have tilted increasingly to China, especially for Taiwan, Hong Kong, and Korea” (Steven Roach)
“ the Japan-China linkage is now getting heightened focus at the senior political level - reinforcing the doubling of trade flows between the two nations in the past five years.

Asia's two largest economies collectively account for 82% of pan-regional GDP. If they become increasingly integrated, that would have profound implications for the rest of the region - to say nothing of the global economy.” (Steven Roach)

Asia, like Eurozone, is not only “decoupling” from US (“beta), but also getting their own “alphas” going.

So, now we have two growing Asia and Euro “alphas” and a stagnating (1H2007) to a goldilocks (2H2007& 2008) US “beta”. (Stephen Jen) Is this what behind the global stock market’s recovering rally from the Shanghai Scare?

A soldier never dies, neither the war. Today’s war is neither “hot” nor “cold”, it is the one between bears and bulls. Just don't miss the bullet.

052907 Live to fear, fearless to live

Marketreflections.com

Philosophically, one starts to fear as he starts to live, until he dies. Compared to pre-capitalism mankind had experienced and post-capitalism as Marx imagined, people have never been more fearful than today, although all “rich” materially. You just can’t escape from fear, and fear is everywhere.

Knowing that, women sometimes advise their potential mates to live alone and not to get into a relationship if not emotionally matured enough.

That actually applies to today’s financial market as well. If one is not emotionally matured enough, stay away from any financial asset, whatsoever. Because like people, no financial asset class today can escape from fear, and that is the law of capitalism, with wolfs being one of the “law enforcement”.

So, what to do with fear? Trade it away in financial market, the typyical capitalist way , if you can’t find “other” solutions.

Today is a “slow cooking” day for those bears trapped by wolfs from May 24 on, cover or not to cover? Some of them have jumped into short big time that day, thinking indexes are “technically damaged” on charts.

“Short sellers are betting against U.S. stocks like never before as the Standard & Poor's 500 Index approaches an all-time high.”

“The amount of shorting -- where traders sell borrowed stocks expecting to buy them back after prices fall -- jumped to 3.1 percent of the total shares listed on the New York Stock Exchange this month. That's the highest since at least 1931, according to Bespoke Investment Group LLC, a research firm in Mamaroneck, New York.”(Bloomberg.com)

As to the Chinese people, they seem fearless. Technically, it could be partially due to the fact that few of them have experienced bubble and its collapse.

“Smith knows a stock bubble when he sees one, and he says he doesn’t see one now. The 2002 Nobel economics prize winner at George Mason University has experimented with how investors inflate market bubbles, how the bubbles pop and how people behave afterward. He has found that, once investors inflate a bubble and endure a crash, they are unlikely to repeat the mistake until memories fade.
In a lab setting, even businessmen studying in an executive M.B.A. program and professional stock traders will create a bubble if given adequate cash, Smith found.
In one experiment, where participants could win small amounts of cash by trading successfully, a participant called him over to complain that the market was running amok. ‘‘He said, ’What is this buying panic?’ ’’ Smith recalls. Even so, the investor returned to the fray. ‘‘He waited a while. Then he started buying.’’
Smith’s experiments show that participants typically inflate a large bubble, cause a crash and then inflate a much smaller bubble, followed by a much smaller decline. After that, they trade cautiously.
That helps explain the once-a-generation element of these extra-long bull markets. ‘‘Once people get experienced, it is very hard to reignite a bubble with those same people. You’ve got to bring in novices and mix them in,’’ Smith says. “(THE ASSOCIATED PRESS)

Technically and theoretically, that bubble comes and pops in financial market is another law of capitalism, and Chinese stock market should not be immune from that.

However, it would be a mystery as to how the bubble law is going to be enforced in Chinese stock market and by what kind of wolfs, under the ruling of CCP. Capitalism’s experience with a communist’s political leadership has just started.

I wrote in one of my previous posts that CCP and the people under its leadership are a totally different “breed” of capitalist “animals”. The Chinese people has the longest history of civilization as well as hardship in the world, which may have made them fearless.

Spiritually, Chinese people were made fearless by Mao, out of Mao’s own expectation. Although the most Chinese people had been forced on “diet” during most of Mao’s time, their minds were totally “liberated” by Mao’s style brainwashing of about 30 years. Now, with Mao long gone, people have all forgot what Mao had taught them. However, they all have learned and remembered one thing from Mao, that is to be fearless to live, just like Mao himself.

With that, let’s see how Chinese stock market reacts to CCP’s new stamp tax on stock trading.

Apart from fears, our times are actually very interesting.
__________________

Compared to its major trading partners, China's share of gains in its economic boom were small and China's share of losses in an economic bust will be large. Nonetheless, China should focus on improving living standards (rather than growth at any cost) for the masses. However, it's a huge task. There may be over 1 billion people in China who earn less than $3 a day (or an aggregate total of about $1 trillion a year, which is one-third to one-half of China's output). China's "middle class" may be over 200 million people. However, most may earn much less than Western minimum wages. China's elite is relatively tiny. So, it seems, income or wealth inequality is huge. China's elite created most of the problems and it can make proper adjustments.

True Picture, CCP have done a good job on improving living standards (better than many demorcatic goverment of developing country) for the masses. However, it's a huge task. There may be 80 million people in China who earn less than $4 a day, over 1 billion people in china who earn ranging $4-$15 a day, 200 million people earn ranging $15-$70 a day, China's "middle class" may be over 10 million people who earn more than $70 a day, SO, it seems, income or wealth inequality is not a problem. Unlike democratic india government who brag her 300 million "middle class", you can not find any word bragged by the CCP.

T Yang, according to your estimate China's GDP is $3 trillion to $13 trillion or more. It can be much more, because your "middle class" includes the elite, which owns most of China (and helps explain China's 50% to 60% saving rate). Based on World Bank loans, China's per capita income reached $1,740 in 2006 (link below) or a GDP below $2.3 trillion (based on 1.3 billion people). Given relatively few receive most of China's income, median per capita income may be around $800.

Arthur Eckart, your data is for Year 2005, the latest one for Year 2006 is $2,040 for China's per captia and $2.7 trillion for GDP according to CCP's propaganda but who cares those number, why? an example is clear that china's individual Income Tax Exemption (not include food,housing,insurance..etc)is Rmb1,600, you do not need to pay a penny if you earn less than Rmb2,400 or $15 a working day if you consider cash allowance for food,housing,insurance..etc, do not tell me that CCP is so kindness to tax hundreds elite only instead of average chinese, you see that CCP can tax Rmb5 rillion ($650 billion) in a year and everyone in china is complaining that they are taxed heavily, is that not amazing? how could you conclude" over 1 billion people in China who earn less than $3 a day "

It's interesting to read you guys' posts, and the following is one of my posts elsewhere

053107 Gaps to be filled

Marketreflections.com

TA: any price ranges not traded, whether on the way up or down, tend to be traded later.

FA: any asset class “biased” by ideologues will often have the “bias” cleared by price.

Etc.

I am actually thinking more of the Chinese stock market, which still has a lot of “gaps”, such as the lack of short sales mechanism, index futures, and so on so force, not to mention the “gaps” among its market participants.

I have written before that any operational issues are likely“non-issues”for CCP, they are always fast-learners and high-achievers. Nevertheless, the “mother” of all challenges for CCP is: CCP always finds itself behind time, things should have been already done yesterday.

This time it is actually a little bit better: CCP has got a solidly growing physical economy, and a largely “fair-to-good”managed society of 1.3 Billion people.

As to the death of individual citizens, emotionally, financially, or physically, that happens all the time, given the size of the population, and the way Chinese GDP grows. Besides, the world now worries much more about the death of “bubble” than that of human “bodies” or human “rights”.

It is not CCP is in-human, it always tries to save lives like any other government. The more recent stock trading tax news was broadcasted 4 minutes passing mid-night. CCP tries to let its stock market citizens to have at least a good sleep first.

Mao spent days thinking about whether to send the Chinese troops to battle US-led force in 1950s, and changed his mind back and force a few times before sending the troops, among them including his son, across Yangtz River into N. Korea. China perhaps lost more solders than US that time, and more recently about the same number of Chinese solders died together with their Vietnamese comrades in 1979.

You got to do what you got to do, just like what Uncle Sam has been doing in Iraq.

What matters more in the end is: have you made it, after bloodshed of certain amounts?

CCP has a long history of successes in whatever it does, if benchmarked on that “price/earning” criteria.

The world’s current “fixation’ with the Chinese stock market bubble will pass, and foreign investors will start buying those China A shares again, after their “bubble fixation” fades as their adrenalinelevel normalizes.

Watching today’s wresting of bears and bulls with each other, particularly on those mega caps, made me thinking of the 1970’s MAD between USA and USSR.

The bears and bulls today largely respected each other’s “neckline”, so the wrestling is “polite”, basically between resistance and support, if you will, for a lot of stocks.

Do they want to break the necks of each other? I am sure they want to. That is all the game is about.

However, the super traders and computers of MMs on those mega caps use both teeth and brain when in fight. They are not just "adrenaline junkies" as they are perceived.

Today, they must have been watching and thinking thought about the “bottom lines” carefully. If time is not right and everything else are not ready yet, you don’t want to launch a full-scale assault prematurely, wasting your gun power. Let’s just eat the “little guys” in between us for today, the head of bears and the head of bulls must have “talked” to each other. This way, they had a “detente” today, although bulls still managed to have “record high” for indexes today.

The current “detente” is fragile though, for bears, and the more so as time goes forward.

Still, today’s “detente” reminds me of the Cuban Missile Crisis in 1962. The Russian bear kind of crossed the “line” and the American bull was ready to fight a full scale of MAD, and that MAD did not happen. The Russian bear retreated out of Caribbean, the America’s “back yard”.

About 20 years later, the “cow boy” Reagan came up with a way to suck the “economic blood” out of the Russian bear, and it worked. USSR started its capitulation around 1985, when Gobi came to power after the last few old “red army” soldiers finally died out of the political arena.

Deng, one of the few Mao’s “comrades” who survived Mao’s periodical “political purges”, and a tough political “animal” of “Mao breed” himself, quickly figured out that Uncle Sam would do the same “Reagan trick” to CCP. And worst than that, CCP can’t play USSR “hedge” card anymore.

Instead, Deng used the famous “Deng’s Cat trick”, and transformed CCP into a “humongous” capitalist almost overnight, a capitalist no other capitalists have ever “traded” with. And everything after that is history.

Today, Deng and other Mao’s “comrades” have long left, with CCP in the hands of a few “Red Young Guard” type politicians, like Mr. Hu.

As smart and strong as Hu has proven himself, he is not comparable to Deng. But Deng’s trick has managed to construct a MAD between USA and PRC, secured by both missiles and US Government Bonds, among other things.

The “pivot point” to kick off USA-PRC MAD is actually 911 event in 2001, which turned CCP into a “comrade” for Uncle Sam, from a “competition”, if not enemy. Soon after that CCP entered into WTO, among other things.
With that “pivot point” , “resistance” atop CCP broke, “resistance” atop US bond broke.

If you look at 10Y US T, the rally actually started in Jan 2000, ahead of CCP’s entry into WTO in Nov 2001.

Nevertheless, it is still a cross-market confirmation of CCP’s breakout. The US stock market’s confirmation came around in Jan 2004, and the Chinese own stock market’s confirmation kind of just “started”.

The core of Deng’s strategy and tactics is "Hide brightness, nourish obscurity".

It worked and it is still working, fooling a lot of people a around, including those perm bears in stock market today, possibly.

TA wise, the "Hide brightness, nourish obscurity" is often the “cup” part of the “cup with handle”. After that, “pivot point” often shows up, with or without handle, depending how impatient the herds are.

Capitalism have made “fuses” or "handle" shorter, for all of us, weather we like it or not. Nobody wants to wait, or can’t afford waiting.

For those bears who have not yet covered short positions, rest well in the weekend. The wresting coming up in the next week could be very challenging.

T Yang, if income inequality in China is similar to the U.S., then China's median per capita income is roughly $500. Median is half above and half below the middle. However, China has made efforts to lower its poverty rate. So, perhaps, median per capita income is around $800. In the U.S., per capita income is $45,000, median household income is also $45,000, and there are 2.6 people per household. In China, per capita income may be $2,000, median household income may also be $2,000, and there may be four people per household. It seems, for the numbers to add up, over 1 billion people in China earn or live on less than $3 a day (given its middle and upper classes). Unfortunately, there are many contradictions in China's statistics, along with misleading information, which strongly tend to be optimistic. So, links to some U.S. data are below. China has been moving into new economic revolutions, although the shift has generally been from agricultural to industrial. China has focused on total output (including maximizing employment) rather than optimal growth or living standards. Consequently, there's evidence to suggest living standards for most in China, i.e. the poor, have declined in recent years. Also, I may add, what's more unequal, someone earning $100 a month compared to another earning $1,000 a month or someone earning $1,000 a month compared to someone earning $10,000 a month. Inequality is considered equal in both examples, although the $100 a month person cannot afford basic necessities.

Arthur Eckart " over 1 billion people in China earn or live on less than $3 a day ,they cannot afford basic necessities", good news, CCP are toppled today by its starving people...., Arthur Eckart's dream.

Disclaimer: marketreflections.com is not politically associated with any political organization, and often uses “political incorrect” language in its analysis. It is politically “neutral” and provides views of a “pure” investor and trader.

Reagan basically disabled Russia into a “half man”, and a “half man” still has to be defended against with US’ missile defense line running cross Eastern Europe, now a part of “non-man” or NATO, and also with a possibly “independent” Kosovo. Why not?

However, the US missile defense line may have a “gap” in Asia. I am not sure the other “non-man”, Japan, who had long been “disabled” politically and militarily, and not long ago financially (“yen appreciation ”) by US, will have enough guts to fill the gap with US, in terms of “developing and deploying” a missile defense system in Asia. Most likely, Japan will “play” it, rather than really doing it.

Historically, 1989 is a critical year in world politics. USSR “peaked” as a world power, Japan “peaked” as a financial power, and a few “Chinese intellectuals” almost made CCP “peaked”. That year, although “smiling from ear to ear”, Reagan had to leave the White House as US President.

I would not say Reagan’s departure “saved” CCP, but it definitely made Deng’s job a lot of easier. Top politicians are not really “produced” by top colleges, such as Yale, Moscow Univ., etc.

In the case of CCP, no matter what college you graduate from, if you can survive and prosper within CCP, a world-class political “machine”, you are most likely a good politician. Although not comparable to Mao and Deng, Jiang and Hu are actually very good, much better than people, including Uncle Sam, had thought.

To hang on as a “man” and to compete with the other “man”, Uncle Sam, CCP knows it has to stay with Deng’s “cat trick”, and maintain China’s economic growth, relentlessly. China can’t afford any significant slowing down, otherwise China will be disabled as well into a “half man”, if not a “non-man”. China’s DF-31A etc., China’s financial, “mind” and other “high” economic powers are not even comparable to those of US, currently.

China is a “man”, largely because there is no other “men” left, except US, in the current world.

That said, China will do whatever it could, economically and politically, domestically and internationally, to grow its economy, in the framework of US-CHINA MAD (“mutually assured development” secured by ballistic missiles, US Treasuries, etc.)

As long as US-China led high-speed global capitalism train keeps going forward, with everybody on board, willingly or unwillingly, there is no real and serious inflation to worry about, particulary in the non-service sectors, because the world economic boom is more likely a “deflation boom”.

ST, bond yield may continue to adjust to a “high growth” world, and stock market may have to adjust to a high “yield parity” between bond and stocks, nothing more serious than that. And USD will be a world reserve currency for at least “100” years (Robert Mondell, supposedly), and “yen carry trade” will continue most likely. What do you expect a rich but a disabled and a non-man to do, in terms of his currency?

I think more likely the current stock market’s “dip” (kind of “half” of the last correction, in terms of %) will be done next week, if not already done. I would buy at dip big names of US “running dogs” of DJI 30, and “growing puppies” such as GOOG. I actually like LFC, CAF, BIDU too, the CCP’s “running dog”, None of them had dipped very much though.

TA wise, more likely, we may not have many “buy at dips” next week. Short-squeeze seemed to have already stared last Friday.

Your blog has inspired me. Recently, I have a strong interest in nature, about the philosophy of the soul, and I have been looking for that book! Thank you very much for your blog, give me the direction!

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